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Geithner on defense over 'too big to fail'

From NBC's Doug AdamsTreasury Secretary Tim Geithner testified this morning before the TARP oversight board (these are not members of Congress, they are academics and financial experts appointed by Congress). Much of the testimony was pretty arcane, but Geithner was feisty.

Elizabeth Warren, the chairwoman of the committee and an expert in bankruptcy law, had a heated interaction with Geithner over AIG. She pushed him on why he bailed out AIG so generously, so that debt holders and speculators didn't lose much at all -- in fact they basically got 100 cents on the dollar.

She was also worried about the impression it gave the market -- an "implicit guarantee" that the government will step in with institutions officials deems "too big to fail." Other board members argued that once the government made the decision that AIG was too big to fail, then they lost any leverage they might have had on negotiating with debt holders.

Geithner defended his actions, saying that in the financial panic, the failure of AIG would have had a "traumatic" effect on the whole credit market.

"In a financial panic," Geithner said, "if you see cascading defaults like this, that will accelerate, not mitigate the panic. ... Nothing would have been better than negotiating something that would have left the taxpayers with less exposure, but the reality is there was no clear other option."

Geithner also defended the administration's proposed regulations to oversee complex financial institutions, insisting that it was not a "permanent TARP" but rather simply giving the government tools to act in a crisis. Before this, the only tools the government had, Geithner said, were simply to declare a banking holiday, or closing the markets entirely.

At the end of the hearing, Geithner summed up with a couple of interesting observations.

"There is no way to put out financial fire ... without taking some risk," Geithner said. "The only solution to that is change the rules of the game," which is what Geithner says he's trying to do with his new proposed regulations of financial institutions.

He also offered the opinion that TARP alone is not what stemmed the financial crisis. He said what "brought back markets" was TARP, coupled with the actions of Fannie Mae in the housing market, and "most importantly, the passage of the Recovery Act. ... We needed the whole arsenal."